If you’re in the market to purchase a home or refinance your current mortgage, you have choices. You can work with a mortgage broker or a mortgage lender. Both can get you the loan you need to finance the property, but they operate differently.
Explore the mortgage broker vs mortgage lender concept below to decide which option is right for you.
What is a Mortgage Broker?
A mortgage broker is a third party that works with sometimes hundreds of lenders. They have many loan options at their disposal to match you with, helping you get the right loan for your needs.
Mortgage brokers work as the middleman between you and the lender. All communication goes through the broker, who talks to the lender on your behalf to process and close the loan. Think of a mortgage broker as your advocate finding you the perfect loan for your needs.
What do Mortgage Brokers Do?
Mortgage brokers don’t underwrite the loan. They also don’t fund it. Instead, they work with lenders who do the underwriting and funding. Mortgage brokers usually have access to wholesale pricing that is oftentimes better than retail lenders. Mortgage brokers basically shop for the borrower to find them the best loan to fit their specific needs.
Mortgage brokers work with many lenders so borrowers have more options when finding the right loan. Instead of applying with multiple lenders and comparing each loan yourself, a broker does this for you, helping you find the most attractive loan for your needs.
Mortgage brokers do not set the interest rate, terms, or fees on the loan. The lenders set these parameters and brokers pass along the information. The only fee a broker may be in control of is the fees they charge, but most brokers get compensated from the lender for bringing them the business.
How do Mortgage Brokers Work?
The mortgage process looks similar with a mortgage broker vs mortgage lender. Here’s how it works:
- Complete a loan application
- Provide your financial information (pay stubs, W-2s, bank statements, letters of explanation, etc.)
- Get pre-approved
- Choose a loan
- Find a house
- Submit the sales contract
- Order the appraisal and title work
- Satisfy any outstanding conditions
- Close the loan
Here’s where they differ, though. Instead of having one or two loan options, you may have many. Mortgage brokers look at all possible options with lenders they work with and present them to you.
Together you decide which loan makes the most sense based on the interest rate, fees, terms, and the loan’s overall cost.
What is a Mortgage Lender?
A mortgage lender is a financial institution that underwrites and funds loans. It may be a bank or strictly a mortgage company. They offer a handful of loan options that borrowers must meet to secure financing with them.
Lenders have underwriting guidelines, sometimes slightly different guidelines for each loan, but they can only offer the loans they underwrite and fund. Lenders set all parameters of the loan including the interest rate, terms, and fees.
What do Mortgage Lenders Do?
Mortgage lenders provide mortgage loans directly to borrowers. Depending on the type of lender they are, they may offer government-backed loans (FHA, VA, etc.), conventional loans (Fannie Mae and Freddie Mac), and portfolio loans (loans they keep on their books and make the requirements).
Mortgage lenders underwrite and fund the loans with their money. They may sell the loans to a secondary market or investor, such as Fannie Mae or Freddie Mac after funding, but the process starts with them.
How do Mortgage Lenders Work?
Mortgage lenders set the parameters for their loans including the rate, terms, and fees. There are a few different types of mortgage lenders you can work with including:
Your local bank may offer mortgage loans. They typically have fewer options than other financial institutions because of the overhead and risk. A few examples are Chase and Bank of America.
With most banks, you can apply for a mortgage online or visit your local branch and work directly with a loan officer. If you’re a current customer of the bank, you may be eligible for a small rate discount.
Banks often times have high-cost structures and a limited amount of programs available to them. For many borrowers, a mortgage broker will have more options to fit their specific needs.
If you belong to a credit union (you must be a member), you may be eligible for one of their mortgage programs. Credit unions often charge lower rates and fees because they are not-for-profit and are member-owned. If you aren’t a member of a credit union, though, you can’t use their mortgage services.
Financial Institutions/Mortgage Lenders
Some financial institutions only handle mortgages; they don’t offer other banking services. You’ll find these lenders mostly online, such as Rocket Mortgage, Quicken Loans, and Loan Depot. Most of the process with these lenders is online, but you can talk to a loan officer over the phone if needed.
8 Reasons a Mortgage Broker is Better
Understanding the mortgage broker vs lender difference is important, but you should also know why a mortgage broker is better. Here are the top 8 reasons.
1. More Options
Mortgage lenders can only offer the products they have which can make it harder to find the right fit. Mortgage brokers, however, work with hundreds of lenders and can give you multiple options.
Whether you want to look at ARM loans versus fixed-rate mortgages, 15-year vs 30-year terms, or compare the same loans but from different lenders, mortgage brokers help you do just that. They’ll match you up with as many loan options as they see fit and show you how they would pan out not only monthly, but over the life of the loan too.
2. Lower Mortgage Rates
Most mortgage brokers can get you lower interest rates because they work with so many lenders. If you don’t like the rate one lender offers, the broker can keep shopping until they find a lender that will give you the low-interest rate you want.
3. Specialized Service
If you work with a lender or bank, you’re just a number. They look to see if you fit within their parameters and if you don’t qualify, they move on to the next borrower.
That’s not the case with mortgage brokers. Because brokers work with hundreds of lenders, they have many options. If the first lender or two brokers try to match you with doesn’t work, they usually have many more options available.
Brokers provide specialized service that includes getting to know you and your financial needs so they can find the right loan for you rather than trying to fit you into a loan that isn’t in your best interest.
4. Brokers can Negotiate
Brokers have the option to negotiate with lenders. Since they bring the business to the lender, they have the upper hand. If a broker feels the borrower deserves a lower rate or better term, they may go to bat for them, trying to get the perfect terms.
Lenders often oblige if you meet the requirements because they want the business. Think of your mortgage broker as your advocate – they work to get the loan that is within your best interest.
5. Brokers Offer a Free Service
Borrowers don’t pay for the broker’s service – the lender compensates the broker by paying them a commission for every loan they close. Think of a broker as the salesperson. If they can match you with a loan and you close it, they get paid.
In the meantime, you get the stellar personalized service brokers offer because they need to get to know you and your financial situation to fit you into the right loan. Most brokers have hundreds of loan options at their disposal, making it easy to match you with the right loan.
6. Mortgage Brokers only Work with Mortgages
If you work with a bank or credit union, you may work with a professional that handles multiple financial products, not just mortgage loans. While it’s nice to know your contact has access to other financial products, they may not have the expertise a mortgage broker has who only deals with mortgage loans.
Whether you have a simple or complicated financial situation, finding the perfect mortgage is the key to financial success. Your home is one of the largest investments you’ll make in your lifetime. Securing the most attractive loan will help make your financial decisions even more successful.
Mortgage brokers offer the utmost flexibility for loans. They work with you to get you the lowest rate possible while also working with various lenders to find a loan that you qualify for.
If you have unique circumstances, especially if you are self-employed or are using asset depletion, a mortgage broker can find a lender that will accept your qualifying factors versus a lender with more black and white requirements that you can’t workaround.
8. You only get Hit with One Credit Inquiry
When you shop around with different lenders, completing an application for each lender, you get hit with multiple credit inquiries. This can damage your credit score significantly if you have too many inquiries.
When you work with a mortgage broker, you only complete one application, and your credit is pulled one time. This means you get hit with only one credit inquiry which shouldn’t hurt your credit score much.
FAQ – Mortgage Broker vs Mortgage Lender
Is a mortgage broker the same as a mortgage lender?
Looking at a mortgage broker vs mortgage lender you’ll see some similarities, but there are many differences. Most borrowers get more options when they work with a mortgage broker, and they have to do less work. The mortgage broker does the ‘shopping’ for the right mortgage loan for you. When you work directly with mortgage lenders, you have to do the legwork to find the right lender.
Is it easier to get a loan with a mortgage broker?
It is often easier to get a loan with a mortgage broker versus a mortgage lender because you only have to complete the application one time. You also have to provide your qualifying documentation once.
When you work with individual lenders, you’ll complete a loan application with each lender and provide the qualifying documentation to each lender. It can be time-consuming and more frustrating to do this on your own when a mortgage broker can do the legwork for you.
Do mortgage brokers charge a fee?
Mortgage brokers are required by law to disclose any fees they charge. Most mortgage brokers, however, get paid by the lender they connect a borrower with when they close the loan. Lenders pay brokers a commission for bringing them the loan. Brokers must disclose the Yield Spread Premium (commission) they earn, but the money typically doesn’t come from your pocket.
Do mortgage brokers offer pre-approvals?
Just like a mortgage lender can pre-approve you for a mortgage, so can mortgage brokers. Your broker is your spokesperson with individual lenders. They submit your information and secure the pre-approval you need. They’ll tell you if any other information is required or what rate/terms lenders pre-approve you for when you apply.
Final Thoughts – Mortgage Broker vs Mortgage Lender
If you’re in the market for a mortgage, consider using a mortgage broker. You’ll get many more benefits, not to mention save a lot of time and headaches.
Whether this is your first mortgage, or you’ve had them before, a mortgage broker is your ally throughout the process, helping you secure the mortgage that makes the most financial sense. At Choice Home Mortgage our professionals are ready to help you secure the mortgage with the best rate and terms. Contact us today to see how great it can be to work with a mortgage broker!